Reed Mettler
May 4, 2007
Econ 311 – 1:30
Professor Whitney
Final Paper
The United States’ Approach to Ethanol: Tarible or Tariffic?
--An International Economics Perspective -Since the oil crises of the late 1970s, much attention has been focused by states
the world over on how to achieve “energy security”—that is, independence from foreign
sources of energy. The recent increase in innovations in and use of renewable energy
technologies (i.e. solar, hydro, geothermal, wind, etc.), cleaner carbon technologies (i.e.
carbon capture, cleaner burning practices, increased efficiency, etc.), and the like can all
be seen as a direct response to this threat of dependency. Another major factor in this
shift, and the reason it has tended largely toward cleanliness and efficiency, are concerns
about the environment. Global warming, or “climate change,” has become a major focus
of both domestic and international spectra in the recent decades. Acknowledging the fact
that the way in which we currently use energy is harming the earth, holding in store a
multitude of devastating consequences for our future, has helped liven and quicken the
pace toward greater implementation of the advanced and alternative energy sources
mentioned above.
The most notable and pursued alternative energy source as of late provides both
national security with regards to energy independence and hope for the environment:
ethanol. “Ethanol is an alcohol-based alternative fuel produced by fermenting and
distilling starch crops that have been converted into simple sugars.”1 It can be
manufactured from crops such as corn, wheat, grass, and sugar cane and, therefore, has
U.S. Department of Energy, “Alternative Fuels Data Center, Ethanol,” 4 June 2006;
<http://www.eere.energy.gov/afdc/altfuel/ethanol.html>, accessed 1 May 2007.
1
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great potential for domestic production by states around the world. This biofuel is also
much cleaner to produce than conventional gasoline and is less harmful to the
environment upon being used. Whether you know it or not, ethanol has already crept its
way into our everyday lives. It is currently being used as an additive in gasoline, mixed
in at refineries, usually to the tune of approximately 10% per gallon, but in some places at
up to 85%—this concentration, as opposed to the former, is considered an alternative fuel
under the U.S. Energy Policy Act of 1992.2
All of these pressures and incentives for the increased use and distribution of
ethanol can be seen throughout the world. Demand is growing in many states as is
production, with Brazil and the United States currently the two largest producers of
ethanol. Though Brazil is the largest exporter, the United States is still importing ethanol
from other states in order to cover excess demand. (See figures 1a, 1b, and 1c) This
rising demand in the U.S. is rooted in a variety sources. First, the use of ethanol is
increasing as “the phasing out of methyl tertiary butyl ether (MTBE) – an oxygenate
blended with petrol that was intended to replace lead in gasoline – in the United States”
becomes fully effective.3 A second, and perhaps more powerful, push were the State of
the Union address given by President Bush in 2006, calling for “Americans to start using
more renewable fuels, …[such as] ethanol…, as a way to reduce U.S. dependence on
foreign oil,” and a bill passed by Congress “requiring the U.S. oil industry to use 7.5
billion gallons a year of renewable fuels by 2012, most of which is…to be ethanol.”4
2
Ibid.
Juliette Kerr, “Brazil’s Finance Minister Asks U.S. to Reduce Ethanol Tariff; Domestic Prices Fall,”
Global Insight (25 April 2006).
4
Lauren Etter, “Can Ethanol Get a Ticket to Ride?; Meanwhile, Imports Are Rising,” Wall Street Journal,
1 Feb. 2007, B1.
3
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The United States has had to implement several international and domestic trade
oriented policies in order to pursue its dreams of supremacy and importance in the rapidly
growing global ethanol market in competition with several other states, who all have
similar plans. These protectionist actions, though they disrupt the natural flow of market
trends toward efficiency, are “necessary” because the United States is not only several
steps behind Brazil with regards to production, use, and exportation of ethanol as a fuel,
but also because the type of ethanol that the United States is producing is inferior to that
which is produced in Brazil. Statistics show that maize (corn) based ethanol, the type
manufactured in the United States, “yields only 30 percent more energy than what is used
to produce it. By contrast, Brazilian sugarcane yields 700 to 800 percent more energy [as
ethanol] than is used in its production.”5 In addition, “Brazil can produce ethanol for as
little as 80 cents a gallon, less than half the price of U.S. ethanol producers…[because]
sugar cane…ferments more quickly into alcohol.” Furthermore, Brazilian resources and
processing methods are so efficient and cost-effective that it is sometimes cheaper for
U.S. buyers to purchase ethanol directly from Brazil, despite the rigidly enforced trade
restrictions which increase the end-user cost by upwards of, and usually much more than,
67 percent.6 (See figure 2) These figures are very telling of the comparative advantage
which Brazil obviously currently has over the United States with regards to ethanol
production and distribution. International economics theory states, in layman’s terms,
that “a country should export what it does most best or least worst and import what it
Wire Feed, “Brazil/U.S.: Environmentalists Decry Ethanol Alliance,” Global Information Network, New
York, 3 April 2007.
6
Lauren Etter and Joel Millman, “Alternative Energy: Ethanol Tariff Loophole Sparks a Boom in
Caribbean; Islands Build Plants To Process Brazil’s Fuel; Farm Belt Cries Foul,” Wall Street Journal, 9
March 2007, A1.
5
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does least best or most worst.”7 While an additional product would be required for an
exact comparative analysis assessment, Brazil’s higher productivity margin and higher
efficiency (both in production methods and of end-product) dictates that it should export
ethanol and that the United States should import it.8 However, the United States has
another agenda; which is signified by the restrictive trade policies it continues to
implement, distorting the natural flow of products between states around the world.
One policy, in particular, has received much attention domestically and
internationally: the United States’ import duty on ethanol from Brazil. (See figure 2) The
following paragraphs will provide an economic analysis of this tariff including
discussions of the specifics of the policy, the foreign and domestic pressures which
oppose and keep it in place, and the consequences of the measure on the fledgling global
ethanol market and the world as a whole.
The U.S. ethanol import tariff, recently extended until 2009, currently requires
that Brazilian exporters of ethanol pay 54 cents to the United States per gallon of ethanol
imported. This trade restriction is a “specific” tariff, which implies a targeted dollar per
unit fee.9 Continued support for this measure, and the pressure behind its extension, can
be traced back to “the disproportionate representation of rural interests in the U.S.
Senate.”10 Any thought of repeal or review of the tariff will be met by stiff opposition by
these “corn-country Republicans,” who “are gearing up for a fight.”11 This position is not
only present within the hearts of certain congressional representatives, but also pursued
Jim Whitney, “Class Notes – Economics 311,” Day 4, 29 Jan. 2007.
Etter and Millman, “Alternative Energy: Ethanol Tariff Loophole…”
9
Ibid. Day 16, 2 Feb. 2007.
10
Holman W. Jenkins, “Business World: Ethanol Liberation Movement,” Wall Street Journal, 14 March
2007, A14.
11
Ibid.
7
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strongly by groups which lobby on behalf of American corn farmers. The logic behind
their position is summed up by Matt Hartwig, spokesman for Renewable Fuels
Association, an ethanol trade group. He states that ending the tariff will not increase U.S.
ethanol supply or lower prices due to Brazil’s already tight ethanol supply. In addition,
he argues that this action will “discourage investment in domestic ethanol production
projects.”12 Despite Hartwig’s dismissal of the facts that Brazil is currently expanding its
production facilities13 and that production subsidies would still provide incentives for
production projects (without the negative national welfare effects of the tariff – see figure
3) his position still seems to hold weight on the Hill. The consequences of the sway of
lobbying groups does not stop there, however. Beyond the effects of the policies they
solidify, they also cause further harm to national welfare by simply doing their job. (See
figure 4) Though U.S. officials, in dialogue with all actors, refer to the tariff as a
“congressional measure,” these other actors still voice their warranted, and well-founded,
opinions.14
The opposing side to the argument of the trade restriction comes from other states
and also, more surprisingly, from within the United States as well. The main proponent
for the drop of the tariff is, of course, Brazil. Eduardo Carvalho, President of Brazilian
Sugarcane Industry Union, makes a clear point by noting that “the oil derivatives market
operates on the basis of free trade…we cannot accept that ethanol trade is conducted in a
19th-century manner, with market protections.”15 Though this union is obviously another
Chemical News & Intelligence, “Refiners Seek Suspension of US Tariff on Ethanol,” 23 May 2006.
David J. Lynch, “Brazil Hopes to Build on its Ethanol Success; Nation Aims to Turn Alternative Fuel
into a Global Commodity,” USA Today, 29 March 2006, Money 1B.
14
Josh Schneyer, “Ethanol Talks to Dominate Bush’s Brazil Visit; Trade Barrier to Remain, No Change on
Import Tariff: Analysts,” Platts Oilgram News, 9 March 2007, 1.
15
Greenwire, “Brazil Says Removing U.S. Import Tariff ‘On the Table’ During Upcoming Meeting,” 2
March 2007, Business, Finance & Technology.
12
13
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lobbying group, they are openly supported by the President of Brazil and many other
parties within the state. Also, despite the fact that this statement has been used in many
forms by many states who have preeminence in a particular market, it does make clear
that global growth in this sector will be extremely difficult with continued restrictions by
such an important player as the United States. Attempts to ask for a tariff-free export
quota, as proposed by Brazil, could be a possible midpoint for the ethanol market on its
move toward unrestricted free trade.16 However, this would take U.S. cooperation which,
as noted above, may be difficult to muster. Hope may come with the fact that there are
some in the United States who would like to see a decrease or removal of the tariff. Bob
Slaughter, president of the National Petrochemical & Refiners Associate, notes that
“increased imports could ease…runaway price inflation in ethanol…as prices have more
than doubled in the past year.”17
Amid demands within and without the United States to fully open the ethanol
trade market countered by requests for protectionism by farmers who inefficiently
produce low-quality ethanol, it will be interesting to see what path the White House and
Congress decide to take: lower trade restrictions? drop the import tariff? provide financial
and technological support to American farmers? attempt to increase production overseas?
or some combination of one or any other of the countless possibilities? There is one
thing of which we can all be certain, however. The current path we are following is
neither efficient in terms of trade or equitable in terms of the improvements which
ethanol could bring to our world; and that is simply not sound economics.
Chemical News & Intelligence, “Brazil Industry Seeks US Tariff-Free Quota for Ethanol,” 14 March
2007.
17
Chemical News Intelligence, “Refiners Seek…”
16
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Bibliography
Chemical News & Intelligence. “Brazil Industry Seeks US Tariff-Free Quota for
Ethanol,” 14 March 2007.
Chemical News & Intelligence. “Refiners Seek Suspension of US Tariff on Ethanol,” 23
May 2006.
Etter, Lauren. “Can Ethanol Get a Ticket to Ride?; Meanwhile, Imports Are Rising,”
Wall Street Journal, 1 Feb. 2007, B1.
Etter, Lauren and Joel Millman. “Alternative Energy: Ethanol Tariff Loophole Sparks a
Boom in Caribbean; Islands Build Plants To Process Brazil’s Fuel; Farm Belt
Cries Foul,” Wall Street Journal, 9 March 2007, A1.
Greenwire. “Brazil Says Removing U.S. Import Tariff ‘On the Table’ During Upcoming
Meeting,” 2 March 2007, Business, Finance & Technology.
Jenkins, Holman W. “Business World: Ethanol Liberation Movement,” Wall Street
Journal, 14 March 2007, A14.
Kerr, Juliette. “Brazil’s Finance Minister Asks U.S. to Reduce Ethanol Tariff; Domestic
Prices Fall,” Global Insight (25 April 2006).
Lynch, David J. “Brazil Hopes to Build on its Ethanol Success; Nation Aims to Turn
Alternative Fuel into a Global Commodity,” USA Today, 29 March 2006, Money
1B.
Schneyer, Josh. “Ethanol Talks to Dominate Bush’s Brazil Visit; Trade Barrier to Remain,
No Change on Import Tariff: Analysts,” Platts Oilgram News, 9 March 2007, 1.
Whitney, Jim. “Class Notes – Economics 311,” Day 4, 29 Jan. 2007.
Wire Feed. “Brazil/U.S.: Environmentalists Decry Ethanol Alliance,” Global Information
Network, New York, 3 April 2007.
U.S. Department of Energy. “Alternative Fuels Data Center, Ethanol,” 4 June 2006;
<http://www.eere.energy.gov/afdc/altfuel/ethanol.html>, accessed 1 May 2007.
Mettler, 8
For Further Reading
There are several other aspects to the United States/Brazil ethanol trade debate
that are very interesting in their own right:
The first are claims of negative externalities which result from the ethanol trade. While
environmental groups tend to focus on the degradation to forests and other ecosystems,
both Fidel Castro and Hugo Chavez argue that the ethanol trade (specifically the use of
corn for fuel) exacerbates world hunger.
Friedman, Thomas L. “Dumb as We Wanna Be [Op-Ed],” New York Times, 20 Sept.
2006, A27.
Global Information Network. “Brazil/U.S.: Environmentalists Decry Ethanol Alliance,”
New York, 3 April 2007.
Kenny, Zoe. “US-Brazil Biofuel Plan Will Condemn 3 Billion People to Death, Says
Fidel,” Los Angeles, 15 April 2007.
The second is a 1983 agreement signed during the Cold War to combat Communism in
the Caribbean. While this document, the Caribbean Basin Initiative, may have served
different, more political purposes in the past, it is being used today as a way to skirt
around the US tariff on Brazilian ethanol. Businesses are bringing hydrated ethanol from
Brazil (about 5% water) to islands represented under this pact and dehydrating it (to
about 1%). This “changed” ethanol is now able to enter the U.S. duty-free.
Greenwire, “Biofuels: Caribbean Set to Become Hub for Ethanol Producers Seeking to
Avoid U.S. Tariff,” 9 March 2007, Business, Finance & Technology .
Guebert, Alan. “Prepare for Big Ethanol Imports Under Free-Trade Pacts,” Lincoln
Journal Star, 26 June 2005, 3.
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